Posts Tagged ‘quarterly results’

The Vitec Group, which owns more than a dozen brands in the broadcast industry, released an update of its financial performance through the first half 2017 based on its new segment reporting.

The change followed the Company’s divestiture of its services business Bexel to NEP. The new structure offers visibility into the two product groups Vitec sells in the broadcast industry.

As of November 2017, The Vitec Group reports across the following three Divisions:

Imaging Solutions contains the assets formerly reported in the Photographic division, which is focused on the professional and consumer photographers.

Production Solutions groups Vitec’s more traditional broadcast products, including camera supports, robotic camera systems, prompters, mobile power, lighting, along with the remaining service activities of Camera Corps and The Camera Store.

One of the stated goals of the reporting modification is to give greater focus to the fast-growing independent content creator market where the Creative Solutions division has a larger presence.

It is interesting to note nearly all of the assets in Creative Solutions were acquired over the past five years.

Broadcast Operating Segment Results

The restated 2016 and 1H 2017 results illustrate the relative revenue contribution and profitability profiles of the Production Solutions and Creative Solutions divisions.

For full year 2016, Production Solutions represented 72.5% of Broadcast sales or £121.6 million. Creative Solutions had sales of £45.9 million or 27.5% of Broadcast revenue.

When including an allocation for corporative overhead the operating margin profile for Production Solutions was 10.9% during 2016 and 16.8% for Creative Solutions.

During the first half of 2017 (ending June 30) Production Solutions had sales of £55.7 million (64.3% of Broadcast) and Creative Solutions contributed £30.8 million of revenue (35.7% of Broadcast).

Operating margins (with corporate allocation) for 1H 2017 were 9.5% for Production Solutions and 17.2% for Creative Solutions.

Vitec Group did not provide comparable year-over-year period presentations of the Divisions. However, even using a straight line estimate, it is reasonable to view the Production Solutions as an approximately flat business (year-over-year) in the first half of 2017, as the second half is usually the stronger portion of the year. Creative Solutions, in contrast, is experiencing strong growth. The magnitude of growth is difficult to estimate given the inorganic additions to the division with the closing of the acquisitions of Offhollywood and Wooden Camera. As a reference point, the 2016 restatement lists £20.4 million of investing activities attributable to the Creative Solutions division.

While growing faster, the Creative Solutions division is also meaningfully more profitable with operating margins in the high teens. Thus, consistent with The Vitec Group’s stated intentions, this reporting approach provides greater visibility into the higher growth, higher margin Creative Solutions division.

In addition, the restatement of 2016 financial results further highlights the merits of the divestiture of Bexel. This is not a commentary on the quality of Bexel, but rather an observation about the fundamentally different characteristics of Bexel’s asset and capital intensive business, which contrasts with the remaining product businesses. Consider that during 2016 – the fourth year in the four year industry cycle – Bexel had revenue of £47.7 million, an adjusted (before impairments and restructuring costs) operating loss of £1.4 million, and capital expenditures of £7.1 million. (It is appropriate to point out Bexel generated operating cash when adjusting for non-cash items and including rental asset disposals).

Full year 2017 results are scheduled for release on February 22, 2018.

Impact of US Tax Change

In the same release, Vitec offered guidance on the impact of the new Tax Cuts and Jobs Act legislation passed in the United States. The immediate impact to Vitec is a revaluation lower of its US deferred tax balance by £7.0 million. This is because the lower US tax rate of 21% (versus 34%) means tax losses have less value in the future.

Video compression specialist ATEME announced 2017 revenue of €49.6 million (~$61.8M USD), an increase of 29.3% versus full year 2016. At a constant exchange rate, year-over-year growth was even greater at 32.5%.

On a quarterly basis, Q4 2017 had revenue of €16.4 million, a 38.3% increase over Q4 2016.

Management called attention to 2017 representing the sixth straight year of revenue growth. Annual revenue increases averaged 23% per year during 2011-2015, and have accelerated since. In a related observation (and given the growth stats, perhaps justified), ATEME has adopted the tag line, “the emerging leader of video delivery.”

In its press release, ATEME also highlighted a strong Q4 in the EMEA region and a multi-million software contract with a major US service provider.

Revenue by Geography:

ATEME benefited from growth in all regions during 2017.

Revenues for the EMEA region during the year were €18.6 million, a 14.1% increase 2016. As a percentage of total sales, EMEA was 38.4% of revenue during 2017, which compares to 43.5% during 2016.

The USA / Canada region contributed revenue of €15.7 million, a 31.4% rise over the year-earlier period. USA / Canada was 32.4% percent of total sales in the period versus 31.9% during 2016.

Latin America was responsible for €7.9 million of revenue during 2017, a substantial increase of 90.4% versus 2016. For 2017, Latin America accounted for 16.5% of total sales, compared to 11.2% during 2016.

Asia Pacific accounted for €6.1 million of revenue, an increase of 22.3% versus the full year 2016. The Asia Pacific region contributed 12.7% of total sales during 2017, versus 13.4% during 2016. This adds to growth of 80% in 2016.

The growth in the Latin America region was attributed to strong demand for digital terrestrial distribution solutions.

Business Outlook:

Commenting on the 2018 outlook, ATEME President Michel Artieres stated, “The outlook for 2018 remains positive and we aim to deliver further healthy growth in all regions. We will continue to focus on developing or acquiring new solutions aimed at expanding our addressable market beyond the video headend segment, downstream to the distribution network.” The reference to ‘acquiring new solutions’ may suggest some upcoming corporate initiatives on the part of ATEME.

Harmonic announced that its revenue for the second quarter of 2017 was $82.9 million, down 24.9% compared to the previous year, and down 0.8% versus the previous quarter.

Bookings for the second quarter of 2017 were $91.1 million, down 22.3% compared to last year, and up 11.0% compared to the previous quarter.

The company attributed its revenue decline to a slowdown in spending, resulting from a strategic shift in spending at broadcasters and media companies, who the company says are increasingly prioritizing OTT and direct-to-consumer offerings over traditional linear platform deployments.

“Over-the-top software, cloud solutions and related subscription business models are becoming more significant drivers of our Video business,” Harmonic CEO Patrick Harshman told investors during the company’s Q2 2017 earnings call. “While subscription video-on-demand over-the-top platform growth is not news, the drive of traditional media companies and service providers to new unified live over-the-top services targeted at both mobile devices and the big screen in the living room is accelerating faster than we anticipated.”

On a GAAP basis, the Harmonic’s net loss for Q2 2017 was $31.5 million, or $(0.39) per diluted share in Q2 2017. This compares to a GAAP net loss of $20.7 million, or $(0.27) per diluted share last year, and a GAAP net loss of $24 million, or $(0.30) per diluted share last quarter.

In light of Harmonic’s declining revenues and ongoing losses, the company indicated it planned to reign-in costs during the second half of 2017. Newly-appointed CFO Sanjay Kalra told analysts: “recognizing these accelerating marketplace changes, we have initiated a realignment of our investments, spending and infrastructure to optimally align with customer demand and opportunity… Our combined second half [2017] operating expenses will be $11 million to $15 million below first half operating expenses.”

GAAP gross margins were 41.1% for the quarter, compared to 43.1% last year, and 48.8% last quarter. The company attributed the decline to lower than expected revenue in the quarter.

Non-GAAP gross margins were 47.9%, compared to 53% last year, and 52.1% last quarter. Non-GAAP video product gross margin was 51.4%, compared to 56.1% last year, and 54.9% last quarter. Non-GAAP cable edge gross margin was 19% during Q2 2017, compared to 38.3% last year, and 29.1% last quarter.

Research and development expense was $27 million for the quarter, compared to $26.5 million last year, and $26.5 million last quarter. Expressed as a percentage of total revenue, R&D expense represented 32.9% of sales in the quarter, compared to 24.3% last year.

SG&A expense was $32.6 million for the quarter, compared to $36.5 million last year, and $36.5 million last quarter. Expressed as a percentage of total revenue, SG&A expense represented 39.6% of sales in the quarter, compared to 33.5% last year.

Geographic Revenues

Revenue in the Americas region was $40.6 million during Q2 2017, a decrease of 29.6% versus the prior year, and an increase of 7.1% versus the previous quarter. The Americas accounted for 49.3% of total Q2 2017 revenue, down from 53.1% last year, and up from 45.7% last quarter.

Discussing the company’s sharp revenue decline in the Americas, Harshman indicated the industry has reached an inflection point in ongoing structural shift from linear platforms to OTT and direct-to-consumer offerings: “Particularly in the U.S. the strategic emphasis on high-quality over-the-top services is impacting the pace of investment in more traditional broadcast and pay -TV systems… What we’re seeing now is a pullback on investments in those traditional platforms and a real strategic mandate to an all-hands-on-deck on the over-the-top, the streaming strategy. It’s not just down to a delayed decision around specific technology, but it’s more, I think, a derivative of a broader strategic shift that we’re seeing playing out…. There’s a lot happening in the media and pay -TV landscape in the U.S., so there’s a lot of thinking going on, there’s a lot of planning, not the least of which is related to the underlying technology platforms. But there’s a lot that our customers are grappling with and trying to figure out.”

EMEA revenue in Q2 2017 was $24.95 million, down 25.3% versus the prior year, and down 1.9% versus the previous quarter. The EMEA region accounted for 30.3% of total Q2 2017 revenue, compared to 30.7% last year and 30.7% last quarter.

APAC revenue in Q2 2017 was $16.75 million, down 14.5% versus the prior year, and down 4.8% versus the previous quarter. The APAC region accounted for 20.3% of total Q2 2017 revenue, compared to 16.2% last year and 23.6% last quarter.

Product Revenues

Video products revenue for the quarter was $44.8 million, down 27.9% versus the previous year, and down 1.5% versus the previous quarter. As a percent of total sales, video products represented 54.5% of revenue in Q2 2017, compared to 56.8% in year-earlier period, and 54.9% in the previous quarter.

Similar to other firms that have embarked on the shift from hardware/CapEx revenues to software/SaaS revenues, company CFO Karla explained: “when a traditional CapEx booking comes in, we typically recognize the vast majority of that booking as revenue immediately or within a quarter or two. But if that booking comes in as a SaaS order, revenue is instead recognized ratably over time, resulting in much less current period revenue, but an expanded backlog. So to be clear, as our Video segment mix shift to SaaS, we expect a near-term revenue and operating profit headwind, offset by a growing backlog that over time will provide greater revenue visibility.”

Harshman took an optimistic tone when asked about the company’s shift to software and SaaS. “While software-as-a-service is still a relatively small component of this overall over-the-top business, the adoption of our SaaS solutions in the second quarter was greater than expected,” he said. “Cloud and SaaS total contract value grew 90% sequentially to a little over $7.5 million, while our annual recurring revenue grew 87% to nearly $6 million. Had these subscription bookings been traditional CapEx orders recognizes revenue immediately, second quarter Video revenue would have grown year-over-year. I will be surprised if [SaaS isn’t 20% of our video revenue] within a year…. I mean I hesitate a little bit, but only because just a quarter ago, we were sitting here relatively pleased candidly that we were at 5% and to see it surge to 8% in the second quarter was certainly a surprise to us.”

Cable Edge revenue was $5.36 million during the quarter, a decline of 66% versus the previous year, and an increase of 9.8% versus the previous quarter. Cable Edge represented 6.5% of revenue in Q2 2017, a decrease versus the 14.4% contribution in the previous year, and an increase versus the 5.9% in the previous quarter.

Harmonic’s Cable Edge business has been in decline for more than a year due to the transition by cable TV operators from legacy EdgeQAM products, to a new generation of products based on C-CAP (Converged Cable Access Platform) technology.

Once again, Harshman was optimistic when describing the outlook for Cable Edge products. “The real news here is that we continue to make material progress advancing our CableOS technology leadership and new business pipeline,” he said. “Our confidence is further bolstered by recent advanced purchase orders. Since our May conference call and through July, we received over $15 million of new CableOS orders, bringing our CableOS backlog to approximately $20 million. Relative to our initial expectations, we are seeing a higher percentage of this demand being associated with new distributed access architectures, which make sense given the growing industry focus.”

Services and support revenue were $32.1 million in Q2 2017, an increase of 4.0% versus the previous year, and a decline of 9.8% versus the previous quarter. As a percentage of overall revenue, service and support accounted for 39.0% in Q2 2017, versus 28.8% last year, and 39.2% last quarter.

Segment Revenues

Broadcast and Media sales were $35.85 million, down 18.1% versus last year, and up 2.8% versus the previous quarter. In aggregate, Broadcast and Media accounted for 43.6% of total revenue, compared to 40.3% last year, and 42.1% last quarter.

Service Provider revenues were $46.42 million, down 29.4% versus last year, and down 3.3% versus the previous quarter. In aggregate, Service Providers accounted for 56.4% of total revenue, compared to 60.5% last year, and 57.9% last quarter.

Business Outlook

The company provided the following guidance for Q3 and Q4 2017.

For the third-quarter of 2017, the company expects revenue to be within the range of $80 – $90 million, comprised of Video revenue in the range of $72 ­- $81 million; and Cable Edge revenue in the range of $8 – $9 million. Q3 non-GAAP gross margins are expected to be in the range of 51% to 52%, with Video gross margin of 55% to 56% and Cable Edge gross margins of 20% to 21%. Q3 2017 non-GAAP operating expenses are expected to be in a range of $48 million to $50 million. Q3 2017 non-GAAP operating losses are expected to be in the range of $9 million to $1 million, and non-GAAP EPS is expected to be in the range of $0.11 to $0.03 The company expects cash and short-term investments at the end of Q3 to be between $40 million and $50 million.

For the fourth-quarter of 2017, the company expects non-GAAP revenue to be within the range of $90 – $100 million, which includes Video revenue of $80 – $86 million and Cable Edge revenue of $10 – $14 million. Q4 2017 non-GAAP gross margins are expected to be 52% to 53.5% with Video gross margins of 55% to 57% and Cable Edge gross margins of 27% to 29%. Q4 2017 non-GAAP operating expenses are expected to be in a from $48 million to $50 million. Q4 2017 non-GAAP operating profit is expected to be in the range of a loss of $3.3 million to profit of $5.5 million. Q4 non-GAAP EPS is expected to be in the range of $0.05 loss to $0.04 profit. The company expects cash and short-term investments at the end of Q4 to be between $40 million and $50 million.

Harmonic exited the quarter with total backlog and deferred revenue of $194.4 million, a record for the company. The company ended the quarter with $52.9 million in cash, down from $56 million last quarter. Employee count at the end of Q2 2017 was 1,338 compared to 1,403 last year, and 1,358 at the end of Q1 2017.

UK-based Vislink plc, which owns broadcast industry brands Advent, Link, MRC Gigawave, and Pebble Beach, announced results for the first half of 2016. 1H 2016 revenue was £22.6 million, a decline of 15% versus the first half of 2015.

Vislink was anticipating challenging results for the first half of 2016 having published a negative trading update on July 6, 2016. The trading update warned sales in Vislink’s Communication System (“VCS”) business were below management expectations. In addition, the July update indicated the further restructuring of VCS would necessitate a non-cash write-off of £6 – £9 million and additional annual cost reductions of £1 – £2 million. This adds to last year’s restructuring of the division when headcount was decreased 26% and a £2.5 million charge was incurred.

The underperformance of VCS caused Vislink to consume its entire banking facility and will subsequently force Vislink to breach its debt covenants. Once Vislink is officially out of compliance with its financing arrangements, the Company’s bankers may call for repayment of existing loans – which Vislink does not have the cash to repay. While this represents a material uncertainty for the Company, Management did indicate it is engaged in constructive discussions with its bankers.

In order to improve cash generation, Vislink’s management is canceling the Company’s dividend until debt drop below EBITDA, canceling its equity incentive program for senior management, and will “continue to examine the appropriateness of the Board and Group structure.”

The announcement has resulted in a greater than 50% decline in Vislink’s stock price decline from close on September 29, 2016. Measured against Vislink’s 52 week stock price, the decline is greater than 75%.

Net loss for the first half of 2016 was £32.2 million or 26.9p per share, compared to a net loss of £0.9 million or 0.4p per share in the year-earlier period.

1H 2016 operating loss was £32.0 million versus an operating loss of £0.8 million during 1H 2015. Operating losses included non-cash write downs of £23.3 million for goodwill and acquired intangibles as well as a write-down of £6.3 million of inventory and capitalized development costs.

A majority of Vislink’s goodwill write-down was associated with the Broadcast division (excluding Pebble Beach). The entire £20.6 million of goodwill for Vislink’s Broadcast division was written down.

Given the magnitude of the non-cash items it is informative to review operating cash flow for the period. During the first six months of 2016 operating cash usage was £1.2 million, compared to generation of £0.8 million during the first half of 2016.

The results for the first half benefited from a positive £2.2 million foreign currency translation based on a weaker GBP.

Broadcast Performance:

Vislink’s broadcast revenue for the first half of 2016 was £20.6 million, a 7.6% decrease versus broadcast revenue in 1H 2015. The decline was primarily related to an 18.5% year-over-year drop in the revenue of Vislink’s Communication Systems (“VCS”) business.

Management attributed the decline in VCS to a combination of a general pause in spending ahead of the adoption of next-generation technologies and a reduction in spend from broadcasters driven by a diversion of budgets from infrastructure to investing in content.

Pebble Beach revenue for 1H 2016 was £5.4 million, a slight decrease of 1.4% when compared to the first half of 2015. In the commentary accompanying the earnings release, the Company highlighted a 53.3% growth in Pebble Beach’s order book to £5.4 million during the 1H 2016 (1H 2015: £3.5 million).

Revenue by Region:

Revenue from the UK & Europe region was £7.6 million during the first half of the year, an increase of 20.1% over the first half of 2015. The UK & Europe represented 33.6% of total revenue for the first six months of the year, versus 23.7% in the same period of 2015.

Revenues from the Americas were £7.9 million, a 27.4% decrease against 1H 2015. On a percentage basis, Americas was 35% of total revenue for the first half of 2016, down from 40.6% in 1H 2015.

First half 2016 revenue from the Middle East and Africa (MEA) was £3.2 million, down 3.2% versus 1H 2015. The MEA region represented 14.2% of revenue in 1H 2016, up from 12.4% during the first half of 2015.

APAC revenue in 1H 2016 was £1.9 million, up 4.1% versus the comparable 2015 period. APAC revenue was 8.4% of total revenue in 1H 2016, up from 7.1% in 1H 2015.

Operating Expenses by Function:

R&D expenses recognized in 1H 2016 were £3.6 million, a 29.5% increase over 1H 2015. As a percentage of revenue, R&D expense was 16.1%, a substantial increase from the 10.6% in 1H 2015. During the first half, Vislink wrote down £0.8 million of capitalized R&D investment. Management did not identify the associated products or technologies associated with the write down.

Sales and marketing (S&M) expenses were £4.6 million, a slight rise of 1.4% against 1H 2015 S&M expense level. On a percentage basis S&M was 20.2%, an increase over the 17.0% of revenue from 1H 2015.

Administrative expenses were £2.9 million, a decrease of 28% versus the first half of 2015.

Cash and Debt Levels:

Vislink had a cash balance of £3.1 on June 30, 2016, down from £3.2 at the end of 2015. During the same time period, the Company’s debt balance increased to £12.0 million from £9.0 at the end of 2015. These developments have increased Vislink’s net debt to £8.8 million. This compares to net debt levels of £5.7 million at 2015 year end and £1.2 million at the end of the first half of 2015.

In the release Management indicted debt has increased further since the end of the June and Vislink is now using its entire Revolving Credit Facility of £15.0 million.

Business Outlook:

Vislink’s order book at June 30, 2016 was £11.4 million, an increase of 60.5% over the same date last year.

In their prepared remarks Management discussed the organic growth of Pebble Beach, its pipeline of software bolt-on acquisitions, and its continued focus growing Vislink’s software business. The below slide is taken from the Vislink’s presentation on the first half results.

“We continue to see significant underlying organic growth in our software business with a strong order intake which has carried through into H2. The long term prospects for Pebble Beach Systems continue to improve as we augment our core enterprise software solutions with cloud enabled software applications. We also have a pipeline of partners and software bolt-on acquisitions which will further enhance the Group strategy of building a high margin, cash generative software business” said John Hawkins Executive Chairman of Vislink.

Evertz announced revenue for the first quarter of its 2017 fiscal year, which ended on July 31, 2016. Revenue for the quarter was C$87.0 million, up 2.5% versus the same period a year ago, and down 9.7% versus the previous quarter.

The strengthening US dollar contributed a foreign exchange gain of C$6.6 million during the quarter.

Net earnings for the quarter were C$18.6 million (C$0.25 earnings per share), flat versus the first fiscal quarter of 2016, and an increase of 129.6% versus the preceding quarter. The company generated C$19.9 million cash from operations in the quarter. This compares to cash used by operations of C$7.8 million during the same period last year and cash from operations of C$10.1 million during the previous quarter.

Revenue results for the quarter were below the consensus estimates of equity analysts of C$95.1 million, while earnings results were above the consensus estimates of analysts of C$0.24 per share.

During management’s exchange with analysts, EVP Brian Campbell attributed the lower level of revenue in the quarter to the typical lumpiness of orders along with the stretching of certain orders into future quarters.

The Company said its shipments during August 2016 were C$31 million, and that its purchase order backlog at the end of the quarter was in excess of C$70 million. The combined shipments and backlog of C$101 million is a record level for Evertz.

The top ten customers in the quarter accounted for 30% of revenue and no customer accounted for an excess of 6% of revenue. Evertz had 104 individual customers each representing over $200,000 of revenue.

Gross margins in the quarter were 57.3%, down slightly from 56.4% last year and also down from 57.1% last quarter. For the quarter operating margins were 28.5%, compared to 29.9% during the same period last year and 23.9% in the FQ4 2016.

Evertz ended the quarter with C$125.4 million of cash and cash equivalents up slightly from C$123.1 million at the end of last quarter.

Revenue by Geography:

Revenue in the US/Canada region was C$52.1 million, an increase of 4.2% versus the same period a year ago, and flat versus the previous quarter. US/Canada sales were 59.9% of total revenue during the quarter, up from 58.9% of revenue during the same period a year ago, and a substantial increase versus the 53% contribution during the preceding quarter.

International revenue was C$34.9 million, flat versus the previous year’s result and a decrease of 22.6% when compared to the previous quarter. International sales were 40.1% of total revenue, down from 41.1% last year and 47.0% last quarter.

Operating Expenditures by Function:

R&D expenses (before tax credits) in the second quarter were C$17.5 million, an increase of 7.4% versus the same period last year, and an increase of 1.2% versus the previous quarter. R&D expenses were 20.1% of revenue in the quarter, higher on a percentage basis than the 19.2% last year and the 17.9% last quarter.

Selling and administrative expenses for the quarter were C$14.9 million, a slight increase of 0.7% versus last year, and a decrease of 8.0% versus the preceding quarter. Selling and administrative expenses represented approximately 17.1% of revenue in the quarter versus 19.2% of revenue during the same period last year, and 17.9% of revenue in the previous quarter.

While Evertz declined to provide an update on the number of SDVN deployments (over 50 SDVN installments as of the 2016 NAB Show), the Company did issue a press release on the receipt of a C$13.5 million purchase order for a “state-of-the-art” IP facility for a US customer. The purchase order includes multiple EXE hyperscale and IPX modular switch cores, IP media gateways, and compression and control solutions.

In responding to a question by Thanos Moschopoulos of BMO Capital Markets on the interest level of cloud for Evertz customers, Mr. Campbell provided commentary on cloud adoption in the media sector. “It’s very much early days, but it is meaningful” stated Mr. Campbell. “And Evertz is well down the path in virtualizing the important components for customers to meet to their needs, whether that’s in a public cloud or in a private cloud or hybrid” continued Mr. Campbell.

Autodesk reported revenue for the second quarter of fiscal year 2017, which aligns with the three month period ending July 31, 2016. Autodesk breaks out the revenue performance of its Media and Entertainment (M&E) business segment, which comprises visual effects and post-production solutions including Maya, Flame, and Shotgun.

Autodesk M&E revenue for the quarter was $34 million, a decrease of 16% compared to the second quarter of fiscal 2015, and a 2.9% decrease versus the preceding quarter, FQ1 2017. M&E contributed 6.2% of Autodesk’s total sales in the quarter. This compares to 6.7% during the year-earlier quarter and 6.8% during the preceding quarter.

There was no commentary provided by Autodesk’s management on the reason for the year-over-year decline, though Autodesk’s overall revenue decline was attributable to the Company’s transition from perpetual licenses to a subscription revenue model.

The close of the second quarter marked another milestone for Autodesk’s transition to a subscription business model, as the Company no longer sells perpetual licenses for its Suite products. Autodesk discontinued selling perpetual licenses for individual products with the close of the fourth fiscal quarter of 2016. Beginning with the start of the current quarter (FQ3 2017) Autodesk only sells subscription or flexible license offerings.

Update on Business Model Transition

Autodesk’s M&E division has been a public data point on the impact of pricing compression in the post-production technology segment of the media technology sector. Revenue for the M&E division has been on a declining revenue trajectory for almost a decade given the impacts of the transition from hardware to software, the collapsing of functionality into Suites, and now the shift from perpetual licenses to subscription.

The below chart illustrates the revenue performance of the M&E division since the second half of fiscal 2008.

At the same time, the gross margin of the M&E division has benefited from these market trends. Gross margins increased from 74.4% in the first quarter of fiscal 2008 to 80.0% during the first fiscal quarter of 2017.

The short-term implications of the business model transition is captured in the first paragraph of Autodesk’s prepared remarks for the quarter, “Autodesk is undergoing a business model transition in which it has discontinued most new perpetual license sales in favor of subscriptions and flexible license arrangements. During the transition, revenue, margins, EPS, deferred revenue, billings and cash flow from operations will be impacted as more revenue is recognized ratably rather than up front and as new product offerings generally have a lower initial purchase price.”

Production and playout video server specialist EVS reported Q2 2016 financial results. Revenues for the second quarter of 2016 were €39.8 million, an increase of 70.8% over Q2 2015 results, and an increase of 48.0% versus the preceding quarter, Q1 2016. Excluding the effect of exchange rate movements and big event rentals, the EVS’s Q2 2016 revenue increased 67.6% versus the year earlier period.

Driving revenue in the quarter were upgrades by outside broadcast (“OB”) companies upgrading equipment in preparation for the large events of 2016, in particular the Rio 2016 Summer Olympics. Year-over-year revenue growth also benefited in part from a softer comparable period of Q2 2015.

Net profit for Q2 2016 amounted to €12.6 million (€0.93 per share), compared to €0.70 million (€0.05 per share) in the year earlier period and €4.9 million (€0.36 per share) in the preceding quarter.

Gross margins for the quarter were 77.3%, an increase of over 1000 basis points compared to Q2 2015, and an increase of 680 basis points when measured against Q1 2016. Gross margins were boosted in part by higher margins associated with Rental revenue. Management attributed the margin increase in Rental revenue to the completion of C-Cast development work, which negatively impacted the gross margin of Rental revenue in earlier periods.

Operating profit for the second quarter of 2016 was €17.40 million, up 815.8% compared to the second quarter of 2015 and up 128.9% versus the first quarter of 2016. Operating margin for the quarter was 44.0%, a sharp rise over the 8.0% operating margins from the same period last year and the 22.7% operating margin achieved during the first quarter of 2016.

Research and development (“R&D”) expenses for the second quarter of 2016 were €5.45 million, or 14.0% of total revenue, a decline of 11.5% versus the R&D expense in Q2 2015, and a decline of 6.0% against Q1 2016. As a percentage of sales, R&D expense was 26.0% of total revenue in Q2 2015 and 22.0% during Q1 2016. Year-over-year comparisons were impacted by costs associated with the closing of EVS’s development office in Chengdu during Q2 2015.

Selling and administrative expenses for the second quarter of 2016 were €7.44 million, or 19.0% of total revenue, representing an increase 4.3% over the second quarter of 2015, and an increase of 16.3% versus the preceding quarter. As a percentage of sales, selling and administrative expense was 30.6% of total revenue in Q2 2015 and 24.0% during Q1 2016.

EVS ended the quarter with 482 employees, down slightly from 483 at the end of the first quarter of 2016, and down from the 471 employees at the end of Q2 2015.

The order book stood at €41.8 million as of August 24, 2016, with 80% to 85% of the current order book set to invoice during the third quarter of 2016. The current order book represents an increase of 13.6% over the order book on August 25, 2015 and a decline of 22.3% compared to the order book on May 10, 2016.

Revenue by Destination:

Revenues from Outside broadcast vans during the second quarter of 2016 were €22.2 million, a 75.3% increase versus the second quarter of 2015, and a 47.2% increase compared to first quarter of 2016. For the second quarter of 2016, this segment contributed 56.0% of the total revenue, which compares to 54.0% in Q2 2015 and 56.0% in Q1 2016. Revenue in this category was driven by customer upgrades to support the large event taking place in 2016.

Revenues from Studio & others during the quarter were €13.7 million, up 53.2% compared to the year earlier period, and up 16.0% versus the preceding quarter. For the second quarter of 2015, this segment contributed 34.0% of total revenue, a decline versus the contribution of 38.0% in Q2 2015 and 44.0% in Q1 2016.

Revenues from Big sporting event rentals during the quarter were €3.9 million, an increase of 127.3% versus the year-earlier period. There were no rental sales in the first quarter of 2016. For the second quarter of 2016, this segment contributed 10.0% of total revenue, a decrease versus 7.0% contribution in Q2 2015.

Systems revenue in the quarter was €36.80 million, up 68.8% versus Q2 2015, and an increase of 49.3% against Q1 2016. During the second quarter of 2016, Systems revenue represented 92.0% of total revenue, comparable to the 94.0% in Q2 2015 and 92.0% in Q1 2016.

Services revenue was €2.98 million for Q2 2016, up 97.4% versus the year ago period, and a rise of 34.2% compared to Q1 2016. Contribution to the second quarter of 2016 revenue was 7.0% of the total, which is in-line with the contribution of 6.0% in Q2 2015 and 8.0% in Q1 2016.

Revenue by Geography:

Revenue from EMEA (excluding events) in the second quarter was €13.5 million, up 52.5% against last year’s comparable quarter, and a rise of 57.7% compared to Q1 2016. Sales in EMEA (excluding events) accounted for 38.0% of EVS’s revenue during the quarter. This compares to 41.0% of total revenue during the second quarter of 2015 and 32.0% during first quarter of 2016.

Americas’ revenue for the second quarter of 2016 was €14.6 million, an increase of 107.8% versus the year-over-year period, and an increase of 38.5% compared to the preceding quarter. Americas accounted for 41.0% of total revenue during the quarter, up from 33.0% of total revenue during Q2 2015 and 39.0% in Q1 2016.

Q2 2016 revenue from the APAC region was €7.71 million, up 36.0% versus last year’s quarter, and a slight decline of 0.3% versus the preceding quarter. APAC accounted for 22.0% of total revenue in the Q2 2016, versus a contribution of 26.0% during Q2 2015 and 29.0% in Q1 2016.

Business Outlook:

As part of the earnings release, Management increased and narrowed revenue guidance for the full year. Revenues for 2016 are now expected between €128 million and €138 million.

During EVS’s conference call, Managing Director & CEO Muriel De Lathouwer, offered commentary on the market environment. “We see that the adoption of 4K and IP progressed across all geographies with more concrete discussions that we have now on those subjects with our customers. We are very happy with the order book and the evolution, but we still don’t want to have too much excitement as we know that part of the uptake of these new technologies will be included in the traditional lifecycle of upgrades.”

Dalet, a provider of software solutions for the creation, management and distribution of multimedia content, announced revenues for the first half of 2016 of €21.9 million, a decrease of 4% versus 1H 2015 revenues of €20.9m.

The year-over-year decline is attributable to a 43% decrease in revenue from hardware resale compared to the first half of 2015. Revenues in 1H 2015 included a one-off large contract where Dalet was responsible for the entire infrastructure, including the hardware procurement.

Gross margin for the first half of 2016 was 87.1%, up from 79.0% in the comparable period during 2015. The over 800 basis point rise in gross margin is again related to the sharp decrease in low-margin hardware resale during 1H 2016.

Revenue breakdown:

Software license revenue was €5.9 million for 1H 2016, up 9% versus 1H 2015. License revenue represented 28.2% of total revenue in 1H 2016, compared to 24.6% in 1H 2015. Growth in software licenses was driven by the North America and Asia-Pacific regions.

Maintenance support was €7.6 million, up 10% versus the 2015 first half. Maintenance revenue represented 36.3% of total revenue in 1H 2016, compared to 31.5% in 1H 2015. Growth in maintenance mirrors the expansion in software licenses and was similarly driven by installed base gains in the North America and Asia-Pacific regions.

Services revenue was €4.2 million in 1H 2016, up 7% versus the year-earlier period. Services revenue was 20.1% of total revenue during the first half of the year and 17.8% during the first half of 2015.

Revenue in Europe remained the largest geographic component at €9.2 million during the first half of the year, a decrease of 14.3% when measured against the first half of 2015. Europe represented 44% of total revenue for the first six months of the year, versus 49% in the same period of 2015. Year-over-year comparisons in Europe were affected by the aforementioned large contract from the first half of 2015 involving a significant hardware resale component.

Revenues from the Americas were €8.0 million, or 38% of total revenue for 1H 2016, up from 36% in 1H 2015. This represented year-over-year growth of 1.5% in the Americas region.

First half 2016 revenue from the Middle East and Africa (MEA) was €0.6 million, down 27.6% versus 1H 2015. The MEA region represented 3.0% of revenue in 1H 2016, down from 3.9% during the first half of 2015.

APAC revenue in 1H 2016 was €2.9 million, up 20% versus the comparable 2015 period. APAC revenue was 14% of total revenue in 1H 2016, up from 11.1% in 1H 2015.

The revenue and gross margin results were announced in a press release. The full operating results will publish in late September.

Business Outlook:

In the press release announcing the first half results, Management indicated revenue performance was as expected for the first six months of 2016. Dalet is anticipating continued growth in the second half 2016, especially in terms of gross margin. Management also stated an objective of improving operating margins to a goal of 4% to 5% by the 2017 fiscal year.

The Company entered the second half of 2016 with an order book of €23 million, which is expected to invoice during the period.

Vizrt announced results for the second quarter of 2016. For the quarter Vizrt had revenue of $34.2 million, an increase of 6.5% versus the second quarter of 2015, and an increase of 21.2% versus the preceding quarter, Q1 2016.

Gross margins for Q2 2016 were 72.6%, which compares to 71.8% gross margins recorded during Q2 2015 and 70.4% gross margins from the preceding quarter.

Operating income for the quarter was $9.0 million, an increase of 56.6% compared to the second quarter of 2015, and an increase of 126.5% over the preceding quarter. Operating margin for Q2 2016 was 26.4% versus 17.9% in Q2 2015 and 14.1% in Q1 2016.

Operating margins benefited from the decision to capitalize $1.7 million of research and development expenses in the quarter – and thereby exclude from operating expenses. Vizrt had one-time expenses of $1.8 million in the quarter related to compensation to the Company’s former CEO, recruitment of the current CEO, and certain legal costs.

Net income for Q2 2016 was $11.0 million. In the year-earlier period, Q2 2015, Vizrt recorded a net loss of $0.1 million, and in the preceding quarter net loss was $6.8 million.

Cash and cash equivalents ended the quarter at a balance of $37.2 million, up slightly from $36.6 million at the end of Q1 2016.

Revenue by Geography:

Revenues from EMEA for the quarter were $16.3 million, an increase of 3.8% in comparison to Q2 2015 and an increase of 27.3% against the preceding quarter. For Q2 2016 EMEA accounted for 48.0% of overall revenue, versus 49.0% in Q2 2015 and 45.0% in Q1 2016.

Revenues from the Americas region were $9.4 million during the second quarter of 2016, a year-over-year decrease of 3.7% and a sequential increase of 3.1%. Americas represented 27.0% of total revenue in the quarter, compared to 30.0% in Q2 2015 and 32.0% in Q1 2016.

Revenues from the Asia-Pacific geography during the second quarter of 2016 were $8.5 million, a 27.5% increase over Q2 2015, and an increase of 34.4% against Q1 2016. Asia-Pacific accounted for 25.0% of total sales in Q2 2016. During the year-earlier period Asia-Pacific contributed 21.0% of sales and in Q1 2016 Asia-Pacific contributed 23.0% of total revenue.

Operating Expenses by Category:

Research and development (“R&D”) expenses in the quarter were $3.9 million, a 24.9% decrease versus the same period a year ago, and a decrease of 28.5% versus the previous quarter. In terms of total sales, R&D expenses represented 11.4% of revenue in the Q2 2016, compared to 17.0% in Q2 2015 and 19.3% in 19.3%. The decline in R&D expense is attributed to the accounting decision in the quarter to capitalize $1.7 million of R&D expenditure. When including this capitalized portion of R&D, total R&D expenses were 16.4% of total sales.

Sales and marketing (“S&M”) expenses in the quarter were $7.39 million, a decrease of 6.8% against the year earlier period and an increase of 2.7% versus Q1 2016. S&M expenses were 21.6% of total sales in the quarter. This compares to 24.7% in Q2 2015 and 25.5% in Q1 2016.

General and administrative (“G&A”) expenses in the quarter were $2.676 million, a decrease of 6.1% versus the same period a year ago, and a decrease of 7.5% versus the preceding quarter. As a percentage of sales, G&A expenses represented 7.8% of revenue in the quarter, versus 9.3% in Q2 2015 and 10.3% in Q1 2016.

“I’m looking forward to working together with Vizrt’s world-class team to serve long term customers while capturing the new market opportunities that are being created in this fast changing industry,” said Mr. Hallén in the press release announcing his appointment.

Mr. Hallén assumed the responsibilities of CEO effective August 1, 2016. Dr. Francois Laborie had served as action CEO through August 1, 2016 and will return to his role as COO of Vizrt.

Business Outlook:

Vizrt ended Q2 2016 with a total backlog of $56 million, a 4% year-over-year decline, and a sequential decrease of 1.1%.

Vizrt’s management provided the following commentary on the market environment, “In general, the market remains cautious with large infrastructure investments prioritized to meet future IP and 4K demands. However, we remain confident that the second half of 2016 will deliver growth for Vizrt as our backlog remains healthy and our customers understand the need to implement efficiency gains while reaching all their viewers regardless of the platform or of the method of consumption.”

DTS reported revenue of $48.7 million for the second quarter of 2016, a 41% year-over-year increase over Q2 2015, and a 7.7% increase over the preceding quarter.

Revenue growth was driven by DTS’s acquisition of iBiquity in the fourth quarter of 2015. iBiquity was a developer and licensor of HD Radio technology.

GAAP gross margins were 87.2% during the quarter down from the 92% gross margins recorded during Q2 2015 and also a decline against the 86.5% gross margins in Q1 2016.

GAAP operating margins were 19% during the quarter. This compares favorable versus the same period last year when GAAP operating margins were 11% and the preceding quarter when GAAP operating margins of 4.0% were recorded.

On a GAAP basis net income for Q2 2016 was $4.7 million or $0.26 per share compared to net income during the year earlier period of $2.3 million or $0.12 per share. Net income for Q1 2016 was $0.5 million or $0.03 per share.

Cash and cash equivalents ended the quarter at $43.8 million, up from $37.2 million at the end of the first quarter of 2016.

Revenue by Market Segment:

DTS’s Home division had revenue of $23 million during the quarter, down 5% against the second quarter of 2015. Management attributed the decline to softness in standalone Blue-ray players and a strong Q2 2015 in DTS’s TV segment. The Home division accounted for 49% of total revenue in the quarter.

The Company’s Automotive division had revenue of $17.5 million in the second quarter, a substantial increase over the comparable year-earlier period (pre-acquisition of iBiquity). As a percentage of total sales, Automotive contributed 37% of overall revenue.

Revenues from DTS’s Mobile category were $6.4 million, an increase of 37% over Q2 2015. Mobile accounted for 14% of DTS’s overall revenue in the quarter.

Operating Expenses by Category:

Sales, General and Administrative (“SG&A”) expenses were $20.8 million in Q2 2016, an increase of 4.9% versus the year prior. SG&A represented 42.6% of sales during the quarter, which compares to 52.8% during Q2 2015.

Research and development (“R&D”) expenses were $12.6 million during the second quarter, an increase of over 30% compared to the second quarter of 2015. The increase is primarily due to an increase in headcount associated with iBiquity. For the quarter, R&D expense was 25.8% of sales. In the year-earlier period R&D represented 27.9% of sales.

Update on Market Adoption of Next-Generation Technologies:

As part of the Q2 Earnings release, management highlighted the market adoption of DTS-enabled content in both the cinema and the home.

The Company’s immersive audio technology, DTS:X, was incorporated in several feature films in the quarter such as Warcraft, Now You See Me 2 and The Secret Life of Pets. In total, 31 feature films have been released with DTS:X audio technology. DTS’s technology is now used in over 130 screens globally, which represents a more than 60% increase over the preceding quarter.

During the quarter DTS announced an agreement with Paramount Home Media Distribution to release a collection of full-length movies using DTS:X beginning with Daddy’s Home, The Big Short, Zoolander 2, and Whiskey Tango Foxtrot.

The below slide is taken from DTS’s investor presentation for the quarter.

During DTS’s conference call with analysts, Chairman and CEO Jon Kircher responded to a question about competition in the theater market and offered context on the competitive environment.

“I think, the marketplace wants choice. DTS:X in the cinema as well as from an immersive audio format perspective is designed to offer a range of performance and flexibility advantages. So, today, we are in 130 screens and growing that doesn’t include all those that potentially or under contract. There is ongoing discussions with other parties around expanding that number. Year-over-year with the product essentially being slightly more than 15 months ago, we are actually tracking I think pretty well to into an accelerating future for DTS:X in cinemas. So, the bottom-line is that, not unlike our prior experience over the past 20 years in the professional space, or in the consumer space is that DTS is going to have an important role to play as it relates to the high quality consumption and enjoyment of immersive entertainment. And this is just part of a broader strategy to support our business downstream (source: SeekingAlpha transcript)” said Mr. Kircher.

Business Outlook:

Based on the strong quarterly results, management increased its guidance for the full year 2016. DTS now anticipates full year revenue in the range of $185 million to $190 million, with growth driven by the mobile and automotive markets. Operating margins for the full year are expected between 10% and 15%.